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"... Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing. The second approach emphasizes that managers are les ..."

Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing. The second approach emphasizes that managers are less than fully rational. It studies the effect of nonstandard preferences and judgmental biases on managerial decisions. This survey reviews the theory, empirical challenges, and current evidence pertaining to each approach. Overall, the behavioral approaches help to explain a number of important financing and investment patterns. The survey closes with a list of open questions.

"... We study the economics of sharing credit with employees, using the U.S. mutual fund industry as our testing ground. Between 1993 and 2004, the share of funds that disclosed manager names to their investors fell significantly. We hypothesize that the choice between named and anonymous management refl ..."

We study the economics of sharing credit with employees, using the U.S. mutual fund industry as our testing ground. Between 1993 and 2004, the share of funds that disclosed manager names to their investors fell significantly. We hypothesize that the choice between named and anonymous management reflects a tradeoff between the marketing and incentive benefits of naming managers and the costs associated with increased ex-post bargaining power. Consistent with this tradeoff, we find that funds with named managers receive more positive media mentions, have greater inflows, and suffer less return diversion, but that departures of named managers reduce inflows, especially for funds with strong past performance. To the extent that the hedge fund boom differentially increased outside opportunities for successful named managers, we predict that it should have increased the costs associated with naming managers and led to more anonymous management. Indeed, we find that the shift towards anonymous management is greater in those asset classes and geographical areas with more hedge fund activity.

"... This paper provides evidence that managers adjust firm advertising, in part, to attract investor attention and influence short term stock returns. First, the paper shows that increased advertising spending is associated with a contemporaneous rise in retail buying and in abnormal stock returns, and ..."

This paper provides evidence that managers adjust firm advertising, in part, to attract investor attention and influence short term stock returns. First, the paper shows that increased advertising spending is associated with a contemporaneous rise in retail buying and in abnormal stock returns, and is followed by lower future returns. Next, the paper documents a significant increase in advertising spending prior to insider sales, and a significant decrease in the following year. A similar pattern arises around equity issues and stock-financed acquisitions, but is absent around debt issues and cash-financed acquisitions. Additional analyses suggest that the humpshaped pattern in advertising spending around equity sales is most consistent with managers’ opportunistically adjusting firm advertising to exploit the return effect to the benefit of their own and that of their existing shareholders.

"... This paper examines the value of sell-side analysts to firms by evaluating the long-term consequences of losing all analyst coverage for periods of at least one year. Our findings are consistent with the hypothesis that analysts add value to a firm by maintaining investor recognition for that firm‟ ..."

This paper examines the value of sell-side analysts to firms by evaluating the long-term consequences of losing all analyst coverage for periods of at least one year. Our findings are consistent with the hypothesis that analysts add value to a firm by maintaining investor recognition for that firm‟s stock. In particular, we find that, in the years after the loss of coverage, sample firms experience a decrease in trading volume, stock liquidity, and institutional ownership, while their operating prospects are similar to their covered peers. Analysis of delisting rates indicates that sample firms are significantly more likely to delist than their covered peers, which are control firms matched on the propensity for bankruptcy and the potential for generating brokerage revenue. We find similar results when we examine a subsample of firms that lose all analyst coverage following an exogenous shock. Our results provide insight into the reasons why firms place so much

"... Behavioral finance studies the application of psychology to finance, with a focus on individual-level cognitive biases. I describe here the sources of judgment and decision biases, how they affect trading and market prices, the role of arbitrage and flows of wealth between more rational and less rat ..."

Behavioral finance studies the application of psychology to finance, with a focus on individual-level cognitive biases. I describe here the sources of judgment and decision biases, how they affect trading and market prices, the role of arbitrage and flows of wealth between more rational and less rational investors, how firms exploit inefficient prices and incite misvaluation, and the effects of managerial judgment biases. There is need for more theory and testing of the effects of feelings on financial decisions and aggregate outcomes. Especially, the time has come to move beyond behavioral finance to social finance, which studies the structure of social interactions, how financial ideas spread and evolve, and how social processes affect financial outcomes.

"... The linkages between style change, fund flows, fund size, and resulting fund performance are complex and not clearly understood. In this paper, we investigate these relationships using a sample of Australian multisector trusts over the sample period 1990 to 1999. We employ a range of fund performanc ..."

The linkages between style change, fund flows, fund size, and resulting fund performance are complex and not clearly understood. In this paper, we investigate these relationships using a sample of Australian multisector trusts over the sample period 1990 to 1999. We employ a range of fund performance measures of stock selectivity. We find that levels of style drift are positively related to selectivity performance, but are not related to fund flows. We also find that fund size is positively related to fund performance and negatively related to expense ratios. Implications of our findings for

"... A unique governance structure for mutual funds is unitary board—one board overseeing all funds in the entire family. We find strong evidence for unitary board as an effective governance mechanism. Funds with unitary boards are associated with lower fees, are more likely to pass the economies of scal ..."

A unique governance structure for mutual funds is unitary board—one board overseeing all funds in the entire family. We find strong evidence for unitary board as an effective governance mechanism. Funds with unitary boards are associated with lower fees, are more likely to pass the economies of scale benefits to investors, are less likely to be involved in trading scandals, and rank higher on stewardship. In contrast, funds with larger or more independent boards charge higher fees and rank lower on stewardship. Our findings indicate that unitary boards of small size, rather than independent boards, may be more beneficial to fund shareholders. JEL Classification: G2, G3 I.

"... Investors may be able to benefit from equity style management. We find that three company characteristics—market value of equity, book-to-market ratio, and dividend yield-capture stylerelated trends in equity returns. We study all firms in the Standard and Poor’s-500 index since 1976. Strategies tha ..."

Investors may be able to benefit from equity style management. We find that three company characteristics—market value of equity, book-to-market ratio, and dividend yield-capture stylerelated trends in equity returns. We study all firms in the Standard and Poor’s-500 index since 1976. Strategies that buy stocks with characteristics that are currently in favor (past winners) and that sell stocks with characteristics that are out-of-favor (past losers) perform well for periods up to 1 year and possibly longer. Style momentum in equity returns is an empirical phenomenon that is distinct from price and industry momentum. D 2004 Elsevier B.V. All rights reserved. Keywords: Style momentum; S&amp;P-500 index; Equity Investment style is the single most important component of success in active equity portfolio management. The institutional investment community knows and appreciates this. 1 For example, much of the exceptional performance of the Fidelity Magellan Fund during the 1980s, under Peter Lynch, was achieved by judicious shifts in style, not by astute stock picking. 2 Many equity managers identify themselves as following a particular style. Consider, e.g., the proliferation of style indexes and the Morningstar style box. Assets in a style

"... This memorandum provides a review of the literature in financial economics related to mutual fund governance, in the form of independent chair and directors, and performance in mutual funds. Overall, we draw two main inferences from our examination of the mutual fund literature: • Boards with a grea ..."

This memorandum provides a review of the literature in financial economics related to mutual fund governance, in the form of independent chair and directors, and performance in mutual funds. Overall, we draw two main inferences from our examination of the mutual fund literature: • Boards with a greater proportion of independent directors are more likely to negotiate and approve lower fees, merge poorly performing funds more quickly or provide greater investor protection from late-trading and market timing. • Broad cross-sectional analysis reveals little consistent evidence that board composition is related to lower fees and higher returns for fund shareholders. These two inferences may seem in conflict, but results of empirical studies are materially affected by the existence of reliable models of economic behavior and the availability of empirical methods, statistical tools and relevant data. Any empirical test of governance structures is implicitly a joint test of a given structure and the model that the researcher relies upon to generate testable results. The lack of consistent evidence that board composition leads to better fund performance may be attributed to several factors. • First, there is no sound structural model that enables researchers to isolate the effect of a given board decision on performance from all other factors that affect performance. • Second, inherent limitations to data and statistical tools as applied in the particular context may render it difficult for research to identify relations that exist and that may be economically significant. This point is discussed at greater length in a companion memorandum by the staff of the Office of Economic Analysis (OEA). • Third, and finally, the nature of the conflicts of interest in mutual funds is such that there may not be a unique relation between governance and performance. ◊ This memorandum was drafted by the staff of the Office of Economic Analysis and has been updated